We constantly emphasize to our clients the importance of tax planning throughout the year. Smart planning can greatly reduce a person’s (and business’) tax burden, which is something we all want. Sometimes that’s easier said than done, however, as important tax legislation that becomes retroactive to the beginning of the year is often not finalized until late in the year. Still, we want to avoid the rush come December. Here are 10 things you can do right now to prepare yourself for filing:
Sell off investment losses to offset capital gains. The hope of a bigger tax return should not determine your investment strategy, but now is the time to determine if you should sell some “losers” before year end in order to offset capital gains you’ve already realized. Using capital losses to offset capital gains can lower or even eliminate capital gains taxes. Wash-sale rules apply only to losses: You can repurchase a winning security shortly before or after you sell it. Talk with your financial advisor to determine which stocks should go and which should stay.
Establish qualified plans. If you are self-employed or a business owner, creating a qualified retirement plan can provide you (and your employees) with tax deferral opportunities and retirement benefits. Act on this before December 31st, as you cannot wait until next April 15 to create the plan and make it retroactive to 2015.
Pay 2016 estimated state income taxes this year. Paying estimated state income taxes in December instead of January 2016 creates a deduction that can offset this year’s income. Prepayment may also reduce the chance of being subject to an Alternative Minimum Tax (AMT) in 2016. However, this strategy is not beneficial if you are paying the AMT for 2015, as it does not allow deductions for state income taxes.
Review stock options. If you will not be subject to AMT, consider exercising vested in-the-money incentive stock options, as this likely will have little or no incremental tax consequence.
Donate to charity. Charitable contributions are deductible from income tax, although limited to a percentage of your adjusted gross income. Deductions over that amount can be carried forward for five years.
If you are plan to gift significantly to charity this year, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year. Your deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit. Businesses also benefit from charitable deductions, so consider a gift on behalf of your company.
Gift it. Only gifts to charity are income tax-deductible but you can make tax-free gifts of up to $14,000 ($28,000 for married couples) without triggering gifts or generation-skipping transfer taxes. Gifts above these amounts may be taxable to the giver or be applied against the gift exemption. The annual gift-tax exclusion is granted once per year, so use it before you lose it.
Going a bit further, you may want to also consider maximizing the lifetime gift-tax exemption. Federal law permits individuals to make tax-free gifts of up to $5.43 million during their lifetimes. Making a lifetime gift is less taxing than a bequest at death, so consider giving now if you can.
Consider installment sales. Structure the disposal of a business or major asset as an installment sale. You won’t have to pay income or capital gains taxes until you actually receive the sale proceeds. Spreading out the taxable profit over several years may keep you in a lower tax bracket. This might therefore help keep your modified adjusted gross income below the threshold amount — and avoid triggering the 3.8 percent Medicare surtax.
Fuel your retirement, even if you’re self-employed. If you are self-employed, max out your pre-tax contributions to your retirement fund(s) to lower your taxable income. This year, sole proprietors can put $16,500 (pre-tax) into a solo 401(k), ($22,000 if you are 50 or over).
Buy stuff. Take advantage of the Section 179 deduction which allows businesses to deduct expenses for a variety of capital equipment purchases -- computers, furniture, business software, and more. For most small businesses, the deduction limit on new or used equipment is $25,000, and the spending cap (the maximum amount that can be spent on equipment before the deduction begins to be reduced on a dollar for dollar basis) is $200,000. This limit may drop in the future, so take advantage now.
Ask for a tax projection. We’re here for you. Ask your BGW CPA tax advisor to prepare a projection for you now based on all known income and deductions for the year. By laying everything out, you can often identify tax-saving opportunities. Doing this will also give you the opportunity to begin getting organized, gathering the documents your tax advisor will need to ensure a timely, accurate, and penalty-free return.
